I gave the Irregulars a quick preview of this one over the weekend, and a lot of folks have been asking about it, so I thought I ought to take a more detailed look.
This is from an ad for the Energy Strategist newsletter, now run by Robert Rapier for Investing Daily, and, as always, it’s an enticing tale about a “secret” company that has a huge and valuable asset that no one knows about. Here’s how he gets us interested:
“It’s the largest independent oil and gas explorer in the United States… but I bet you’ve never heard of it.
“Like many firms that never deal directly with the public, this one flies under the radar. It has been quietly successful for decades as it goes about its profitable business ….
“We’re in East Africa, specifically Mozambique, the world’s most promising new area for deepwater exploration.
“This region of astonishingly rich gas discoveries is in the offshore Rovuma Basin, and it goes by the humble name of “Area 1.” But there’s nothing humble about its estimated gas reserves of 100 trillion cubic feet.
“Let’s put that into perspective. The United States produced just 18 trillion cubic feet of natural gas last year.
“The proven reserves of New York’s much-hyped Marcellus Formation total 13 trillion cubic feet….
“Bottom line, this gas find off Mozambique is the largest discovery of the decade. And yet most investors have no clue.”
So … that’s already enough clues for the sleuths among you to sniff out a preemptive answer (and I’m sure several of you have already done so), but let’s check out a few more details just to make sure:
“… it’s not hard-to-get-at shale gas either. This gas is located about 5,000 feet below the surface. That’s a perfect match for the skills this company has developed from 37 years of operating in the Gulf of Mexico.
“Even better, half of this gas is in one enormous, interconnected field. That makes it much easier to recover the gas, since drilling is more efficient.
“… this is an American company that has been trading on the NYSE for 27 years….
“More reasons to like this company
“If all this stock had going for it was its huge Mozambique gas find, it would be worth buying. But there’s more:
“While based in Texas, it operates in Canada, Algeria, the Red Sea and Peru. So the execs are no strangers to dealing with foreign governments.
“This company has been around since 1959. That staying power means a lot to me. And it has grown steadily since its founding—but now, I expect it to reach warp speed.
“This firm is by far the most experienced deepwater operator in Mozambique.
“In East Africa, in addition to the Rovuma Basin off Mozambique, the company holds significant interests in exploratory blocks off Kenya.
So why is this Mozambique find such a big deal? How much will the stock go up?
“After this company made a smaller deepwater discovery in the Gulf of Mexico in 2009, the stock jumped 124% in just five months. When it starts to monetize this much bigger find, 124% could look like small potatoes.
“From the research I’ve done, I think this stock could be +170% higher within 15 months. That’s when production starts and the company begins to cash in on years of hard work.”Are you getting our free Daily Update
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OK, so let’s remember that every time a newsletter teases how great a stock has done since some announcement or discovery or other event back in 2008 or 2009, we need to mark that against the fact that everything has done well since then — the S&P 500 has roughly doubled since the 2009 lows.
And yes, this company did indeed announce a big discovery in the Gulf of Mexico in February, 2009, and the stock has done quite a bit better than the S&P 500 in the three years since then, though with much, much more volatility — a lot of that volatility was brought about by the fact that this teased company, which is, as you’ve probably guessed, Anadarko Petroleum (APC), was a junior partner on the Macondo Prospect that was operated by BP, and therefore they were tied up with the liability for the Deepwater Horizon explosion/spill almost three years ago.
Anadarko is indeed one of the more appealing large energy companies in the world right now — they have a nice, stable base of earnings from the US, largely from the Rocky Mountains and the Marcellus and other shale areas, and they’ve been using a lot of that cash flow to fund some pretty successful global exploration projects, including the Mozambique wells that have found enough natural gas to easily justify building LNG plants in East Africa for export. Anadarko is the operator of Area 1 offshore Mozambique, though they have “unitized” some of the project development by combining forces with ENI, which is operating the neighboring Area 4 which also touches some of these same reservoirs, and the size is, well, gigantic. It’s going to cost tens of billions of dollars to develop these fields and to build the massive LNG export liquefaction and processing plants and export facilities, but there is apparently more gas export capacity than Qatar and still plenty of demand from Asian LNG buyers who can help fund development.
Does it mean Anadarko’s stock will more than double in the next 15 months? Well … analysts are expecting earnings to bump up by about 25% next year, which would mean more than $5 per share in earnings in 2014, and analysts are pricing in some solid growth for many years to come. Anadarko is trading at a significantly higher valuation than the big integrated oil & gas companies like ExxonMobil (XOM), BP (BP) or Chevron (CVX), but that’s because most of those companies are having a terrible time growing. Anadarko is a rarity among big energy companies: It’s finding new reserves quite a bit more quickly than it’s producing them — as you grow, it becomes harder and harder to find new discoveries or drill enough reserves to replace the oil and gas you’re selling each year, but Anadarko has done so, at least recently, and been rewarded by investors as a result (reserve replacement was recently at over 130% even if you include the assets they sold in 2012).
They reported excellent earnings for their fourth quarter a week ago (you can also see the conference call transcript here), and they’re looking to sell almost a third of their ownership stake in the Mozambique project to help fund the huge investment required — the goal is to sell a 10% slice, so their ownership would go down to 26.5%, and the likely buyers are probably big LNG customers in China, South Korea and Japan, though many of the big global oil and gas majors are likely to kick the tires as well.
So yes, Anadarko is a major independent exploration and production company that’s riding quite high right now and they’re getting a premium valuation based on both their liquids-rich US production growth in the Eagle Ford, Marcellus and Rocky Mountains regions and on their big international prospects — but you only have to look to similarly large Apache (APA) to see what happens when thing don’t go as well for these kinds of companies, or when they hit political risk or a few dry wells or overpriced acquisitions (APA was one of the more aggressive acquirers and explorers over recent years, and is now being dragged down by their substantial exposure to Egypt).
Anadarko is a really big company, with a market cap of $40 billion and another $10 billion in debt, but it is still sometimes rumored as a takeover candidate because the big integrated oil companies around the world are so thirsty for reserve replenishment — and I suppose that could happen, there are a handful of $100+ billion oil companies that could finagle a takeover of Anadarko (Exxon, Chevron, etc) and several Chinese companies that could do anything they wanted with state backing, though given Anadarko’s large size and premium valuation I think it’s more likely that they’ll just keep selling slices of the Mozambique field and their other exploration projects.
There has been a lot of discovery in East Africa both onshore and offshore over the last year or two, with this huge field that’s being run by Anadarko probably the most significant one (though there are dozens of drilling projects offshore Tanzania and Kenya that may turn out to be similar — the whole area is so under-explored that someone seems to find a new elephant-sized gas field every year). The confidence in these projects is high, and the governments are cooperating and pushing for the companies to coordinate and develop export facilities as quickly as possible, so Mozambique is shooting to get their first LNG exports out in 2018 and the money is flowing to get that done. At least for now.
I’m actually probably a little more interested in some of the slightly larger players that are a bit less premium-priced, including Statoil (STO), which I’ve owned in the past and which seems to have a toehold in every big offshore project around the world … and in truth, I’ve personally preferred to invest more in the oil service companies and LNG shipping companies, other than my lucky speculation in Africa Oil (onshore Kenya). But Anadarko is certainly one of the investor favorites now, and they are riding a wave of good news and good earnings and good reserves replacing discoveries, so I don’t have specific reasons to avoid this one. Unless, of course, you think LNG import prices will take a hit, or oil or gas prices will fall substantially over the next year or two … if that happens, most of the oil majors will stink but the premium priced exploration and production companies like Anadarko, who get little benefit from refining margins or retailing, are likely to fall a bit harder than the Exxon Mobils of the world.
But my opinion shouldn’t drive your money — so what do you think? Interested in a profitable large cap company that might begin producing trillions of cubic feet of natural gas in Mozambique in five or six years? Let us know with a comment below.